This marijuana stock is 900% higher and still smoking

Opinion: Cannabis Sativa has plenty of buzz, but it could come crashing down

A quick look at two of this year’s hottest stocks shows that investors chasing fads could take quite a beating if they aren’t careful.

Bubble, Bubble Bubble. Does that look or sound familiar? At this point in a five-year bull run, it’s no surprise to see a continual stream of articles warning of a coming market “correction.” Isn’t that a strange term for a market decline? A healthy stock market is usually at or near a record level, because it is the nature of market economies to expand and for prices to inflate.

Consider the dire warnings of a 20% correction. That would follow a 6% year-to-date rise for the S&P 1500 Composite index, after a 30% increase in 2013 and a 12% gain in 2012. For investors with very long horizons, including those making regular contributions to 401(k) or other tax-deferred retirement accounts, the correction wouldn’t be such a bad thing, since subsequent contributions would buy in at lower prices.

But you’ve heard that argument before.

Here’s something else to consider: The largest U.S. companies are trading at considerably lower valuations, on average, than smaller ones. The large-cap S&P 500 Index
SPX, -1.42%
trades for 14.8 times aggregate consensus 2015 earnings estimates, according to FactSet. Meanwhile, the S&P Midcap 400 Index
MID, -0.93%
trades for 16 times forward EPS estimates and the S&P Small Cap 600 Index
SML, -0.96%
trades for 16.2 times forward estimates.

There are winners and losers in any market. But among the most speculative of small-cap stocks, everybody’s favorite punching bag is Cynk Technology Corp.
CYNK, -99.00%
which is headquartered in Las Vegas, and describes itself as a “development stage company which focuses on a social network.” Cynk also says it “intends to serve seekers, who want to meet people; mavens, who know a lot of people; and targets, who are people that other people want to meet.”

Isn’t that nice? Cynk is a wonderful stock. Since the company reports no assets or revenue, there’s very little for investors or analysts to worry about. Then again, there’s nothing at all to support any stock price, save the above word games. The problem is that’s pretty much all Cynk has to say about anything.

Cynk was founded in 2008, but has never commenced operations. The stock this year traded for 10 cents or less through June 16, after which it began a 17-session ride up to a closing price of $13.90 on July 10, for a year-to-date gain of 13,800%. Trading was then halted by the Securities and Exchange Commission, and when it resumed last Friday, the stock sank 85% to $2.10. Then on Monday it dropped another 71% to 60 cents. That was followed by a 33% decline on Tuesday to 40 cents.

There’s a point to all this, which is that you shouldn’t buy stock in any company if you’re unwilling to look at its financial statements. It’s not as difficult as it sounds to pull up quarterly or annual reports, look for trends and read management’s comments.

A ‘real’ hot small-cap stock

Among small-cap U.S. companies valued at between $50 million and $2.5 billion that have been publicly listed at least since the end of last year, the strongest performer has been Cannabis Sativa Inc.
CBDS, -5.79%
of Salt Lake City, which is up 900% year-to-date through Tuesday’s close at $7.50.

And unlike Cynk, Cannabis Sativa is a real company that produces and sells products and regularly files financial statements.

As its name implies, Cannabis Sativa is in the business of “developing, manufacturing, and selling plant-derived lotions, creams, and other formulations for human consumption.” These include herbal compounds. The current line of products, many of which are derived from marijuana, are marketed through Wild Earth Naturals, which Cannabis Sativa acquired last year.

Former New Mexico governor and U.S. presidential candidate Gary Johnson was appointed CEO of the company on July 7, and has long touted the benefits of hemp oil as part of treatments to help with a variety of illnesses and conditions.

Getty Images

Cannabis Sativa CEO and former New Mexico Gov. Gary Johnson

On July 1, Cannabis Sativa completed its acquisition of Kush Inc., which is a “development stage” company seeking to obtain a patent on a hybrid medicinal strain of cannabis called “CTA,” described by former Kush CEO and current Cannabis Sativa chairman Steve Kubby as “extremely potent.”

Kubby said in the press release announcing the January agreement that “the more [CTA] you smoke, the higher you get, right up to psychedelic levels.”

So despite Cannabis Sativa’s current focus on products meant to improve health, the company is looking to score big by distributing recreational marijuana products in the only two states where it is currently legal to do so.

So should you consider buying Cannabis Sativa stock after its amazing runup?

The bull case: Johnson has said that Cannabis Sativa is just getting off the ground, and that the company’s goal “is to be a leader in the industry as the market explodes.” If more states quickly follow Washington and Colorado by legalizing marijuana, the stock could pop again, and the company could see a remarkable increase in sales for its current line of products.

The strategy of pursuing one or more patents for hybrid strains of marijuana, which hasn’t been done in the United States before, could also pay off for investors, although Kush’s 2010 patent filing still hasn’t been approved.

According to Johnson, 57% of Americans support the full legalization of marijuana, but no governors or U.S. senators have publicly lent support to legalization.

In a phone interview Tuesday, Johnson touted various medical benefits of oil derived from cannabis, known as CBD oil, which is used in some Wild Earth Naturals products. “You can separate the oil from THC, the psychoactive ingredient of cannabis. Right now, kids with epilepsy [use medical products containing CBD oil] to find themselves no longer suffering epileptic seizures.”

“Kids who had been told they wouldn’t live to 21 can now live somewhat normal lives,” he said.

Johnson went on to say that CBD “also has applications to multiple sclerosis and Parkinson’s disease.”

The problem is that CBD contains “microscopic” trace amounts of THC, which means the federal government and all 50 states treat the oil as a controlled substance, similar to non-alcoholic beer.

Johnson is so enthusiastic about the various medical uses for marijuana products and a changing political landscape that he predicts “in 20 years, cannabis-based pharma will amount to 20% of the pharma market.”

“That is just staggering, and is something people just don’t understand and don’t appreciate,” he said.

Johnson confirmed the company’s plans to market marijuana products for recreational use as well. Sublingual products, including lozenges manufactured by Cannabis Sativa, have medical uses and can even replace some prescription pain relievers that Johnson said cause 100,000 deaths per year in the United States.

The lozenges are also “very very pleasant,” he said. “Why would you ever smoke it with this alternative? I have always believed legalizing marijuana will lead to less overall substance abuse because people will find it a safer alternative to alcohol.”

The bear case: Cannabis Sativa in its most recent annual report warned that its operations and prospects “involve a high degree of risk,” adding, “We do not have sufficient cash on hand to pay our current liabilities.” As of March 31, the company’s current assets totaled just $73,671, while its current (and total) liabilities totaled $317,361.

There’s no way of knowing when or if the patent will be approved, and the company’s first-quarter revenue totaled just $1,445. There isn’t much in place to support the market value of $113 million.

Cannabis Sativa has agreed to pay Kubby $1 million in compensation in 2016 and another $1 million, either in cash or stock. The company will need to raise a lot more cash, through dilutive common-equity offerings, or by issuing convertible debt, which can also eventually dilute common shareholders.

“The company has a foundation in place with a good group of individuals to run the company and design its products,” wrote independent chartered financial analyst Fred Rockwell in a research report on July 14. However, he added, “Investing in the company is a bet on growth that may not materialize. The problem is that news and events drive the stock price and anything that could hurt the company’s business will send the stock price down.

“Besides its lozenges and pending patents the company is not much more than an idea. Its lozenges are not the only ones on the market,” Rockwell wrote, while also pointing out that the company only now is putting together a sales force, and adding, “If the company can’t find partners to make products it will not be able to bring products to market.

Johnson said starting up the business is “an ongoing process and we believe we will be able to raise money.”

Here’s where the investor will need to rely on a crystal ball. The big question is whether the industry momentum will be enough to carry the stock so high that the coming dilution won’t be too painful for current shareholders.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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